Question

You are engaged to audit Buttfuski Alcohol Distribution Company for the year ended 12.31.18 and to reduce the workload at year end, the company, upon your recommendation took its annual physical inventory at 11.30.18. You observed the taking of the inventory and did test counts throughout the physical observation. The company’s inventory account includes raw materials and work in process maintained on a perpetual basis and valued at FIFO cost. There is no finished goods inventory.

The company’s physical inventory revealed that the inventory of $1,695,960 was understated by $84,000. To avoid delay in completing its monthly financial statements, the company decided not to adjust the inventory until year end except for some obsolete inventory amounting to $7,000 that was charged to cost of goods sold. You noted the following: pricing tests revealed inventory overstated by $61,000; an understatement of physical inventory of $4,200 because of mathematical errors; cost of goods sold amounted to $10,000,000.

Required:

Calculate the adjusted amount of inventory at 11.30.18

Calculate the adjusted amount of cost of goods sold at 11.30.18, assuming the effect of the above transactions would flow through cost of goods sold.

Answer 1

i) Adjusted amount of Inventory as on 11.30.2018
Particulars	Amount in $
Inventory - As per company records	16,95,960
Add :
Understatement of Inventory to be added back to Inventory	84,000
Understatement of Inventory because of mathematical errors to be added back to Inventory	4,200
Less:
Overstatement of Inventory on conducting pricing tests to be deducted	-61,000
Adjusted amount of Inventory as on 11.30.2018	17,23,160
Note: COGS and Inventory has an inverse relationship i.e., An increase in Closing Inventory decreases the COGS
ii) Adjusted Cost of Goods Sold (COGS) at 11.30.2018
Particulars	Amount in $
As per record	10,00,000
Increase in Inventory (1723160-1695960)	27,200
Adjusted Cost of Goods Sold (COGS) at 11.30.2018	9,72,800